The Best State to Form Your LLC

I’ve been getting a lot of questions lately asking about the best state to form your LLC. I’m seeing a lot of interest in states that don’t require you to report much information and are inexpensive, like Missouri, and Wyoming. But are these really the best places to set up your LLC?

The answer depends on you, and what your goals are. For example, I had a call from someone who was buying real estate in Florida. She was concerned about privacy and wanted to set up an LLC in Missouri, because the state’s public records don’t list the owners, whereas Florida’ public records do. Missouri is also a low-cost state to form and maintain an LLC in. So it made sense to her.

Here’s the problem(s)

1. By using Missouri as the LLC’s home, she has potentially created a tax-filing obligation in that state; and

2.  She has no legal protection in Florida, where the property is physically located.

Not all states tax you for having an LLC set up there, but some do. California, for example, charges a franchise tax of $800/year for every business set up there. A franchise tax isn’t an income tax, it’s a privilege tax (i.e. for the privilege of filing in that state, you get to pay). It’s typically a fixed rate and because it’s based on income, it’s payable whether your LLC made money, lost money, or was completely inactive. It’s certainly something to look at when choosing your LLC’s formation state.

Even if there were no accidental tax problems, setting up an LLC outside the state in this case was still going to cost the client money. Most states insist you register your LLC into that state before you have the right to bring a lawsuit or defend yourself against a lawsuit. That includes things like tenant issues. If this person ever had to evict a tenant, or counter a lawsuit filed by someone injured on the property, she would have no legal standing to do so until the LLC was registered into Florida. And, when she did that, she would lose the privacy she wanted. Plus it would cost more each year to run the LLC in 2 states.

Fortunately, there are other ways for her to get that privacy and still use a Florida company, which was another part of our discussion.

With real estate, the choice is usually fairly straightforward, especially if you have properties concentrated in just one or two states.

But what about other types of business operations? 

I see the same thing from people who want to do business on the Internet, and want to set up their LLC in Nevada. Nevada doesn’t have an income tax, which makes it attractive. However, if you want to take any money out of your Nevada company, taxes on that money are going to follow you home. That’s not to say Nevada is always a bad choice – but it’s a choice you need to think through, and cover all the angles.

Part of what we do here, at Smart Business Incorporation, is help you to define and measure those angles. Our goal is to get you into the structure that works for you, helps to protect your business or investments, and keeps your fees and taxes as low as possible. So why not contact us before you start your next LLC and see how we can help you?



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